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The major market indexes all closed very close to their opening today. After a strong run-up in the morning, the selling began in the afternoon and pulled everything back. RUT closed at $580.24 after being as high as $586.
The market's strength this morning caused me to adjust both of my condors for September and October. I bought two Oct $620 calls at $9.80 for the Sept condor and the position ended the day at a P/L = -$610, delta = -$82 and theta = +$187.
I bought one Nov $640 call at $10.90 for the Oct condor and that position ended the day at -$820, delta = -$17 and theta = +$47. The improvement to the position from a risk management standpoint is apparent from the risk/reward curves before and after the adjustment; see how the risk/reward curve for today (red) is more vertical after the adjustment, indicating a smaller loss if the market continues upward. It allows us to hold the position and see if the market pulls back before closing the position, i.e., it buys us time. As it turned out, I probably didn't need to make these adjustments, but it is better to err on the side of caution in this business.
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Bernanke's assurance that the economy is beginning to recover and a better than expected Existing Home Sales report was all it took to bring the buyers to the table today. RUT closed at $581.51 and SPX closed at $1026.13, both indexes now at levels not seen since October of 2008. August settlement for the Russell 2000 index was $576.88, about $8 higher than Thursday's close. I have been keeping a spreadsheet for the past several years of the Thursday closing prices and Friday morning settlement prices for RUT and SPX. The average absolute change for RUT in 2009 has been almost $5 ($11 in 2008). For SPX the respective values are $9 in 2009 and $15 in 2008. That is why it is wise to close positions before settlement if there is any doubt about the index gapping up or down enough to hit your short strike - hence, my two standard deviation rule.
My condors are already starting to feel the heat from the bullish market this week. The Sept position stands at a P/L of ($770), delta = -$140, and theta = +$185, while Oct stands at a P/L of ($630), delta = -$43, and theta = +$53. The short call strikes have deltas of 17. These positions will require adjustment next week if this move upward continues.
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Today's trading was erratic but ended on a reasonably positive note as the government's report of declining oil inventories boosted hopes for a recovering economy. RUT closed at $561.65 and SPX closed at $996, just under the psychologically significant $1000 mark. It appears the markets are "treading water" for a bit and the bull rally is still alive; however, it is a nervous market and some unexpected economic news could send it south in a hurry, so be careful. Have your stop loss orders entered and ready to automatically trigger.
My August iron condor stands at -$570, delta = -$7 and theta = +$298. The $590 call is over three standard deviations away from the current index price of $562. That $28 of safety margin is borderline. A $28 gap up in RUT for the settlement on Friday morning would be unusual, but it isn't unprecedented in the last several volatile months. Therefore, if the RUT trades upward tomorrow, I will close the $590/$600 call spreads and allow the $480/$490 put spreads to expire worthless.
My September iron condor stands at -$170, delta = -$28 and theta = +$193, an excellent theta/delta ratio. No adjustments are necessary.
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Higher jobless claims than expected only caused a momentary pause in the market this morning. By noon, everything was headed up for the day. The RUT closed at $568.68 and SPX closed at $1007.37. RUT is closing in on its previous high of $575 and SPX is back above the $1000 resistance level. This market continues to show significant underlying strength. On the other hand, the trading volume this week has been somewhat below historic averages, so the big players may be still waiting to make their move.
As I mentioned yesterday, I was planning to close my August $590/$600 calls if RUT moved up much at all. So I entered orders to close those spreads this morning. I entered my order at the ask price of $0.10 and left it out there for about 30 minutes. I have seen this before; when you get down to the last hours before expiration, the market makers don't have any interest in the worthless long options of our far OTM spreads (the $600 calls in this case). So I cancelled my order and bought back the $590 calls for $0.05, effectively closing that side of the condor. I will allow the $480/$490 put spreads to expire worthless. Assuming tomorrow's settlement price for RUT is above $490 (hopefully that is a safe assumption!), my August iron condor ends its life at a net loss of $810, or 5% on the capital at risk in this trade. One of my rules for trading the iron condor is to control my losses in these crazy months to less than the profit of a good month. Since we started this condor with hopes of a $4,000 profit, my $810 loss is very acceptable. This condor was one of the most active positions I have ever managed; note that I started with an adjustment early to protect the downside, and then scrambled for the rest of the time buying hedges and rolling spreads up in front of July's strong rally. It may seem bizarre to some people, but I am very proud of my $810 loss; the last 55 days have been a wild ride. To escape and only give up about 20% of a typical month's gains is a victory.
My Sept RUT iron condor stands at a P/L of +$160, delta = -$47 and a +$194 theta, so it is in an excellent position and no adjustments are necessary.
I opened an October iron condor on RUT today: 15 contracts of the $640/$650 calls for $0.90 and 15 contracts of the $460/$470 puts for $0.70, for a total credit of $2,400. Plus or minus one standard deviation spanned $499 to $630 when I established this position this morning. So the calls are just outside of one standard deviation, but I allowed extra safety margin on the downside. I just can't develop any confidence in this economy with record unemployment, foreclosures, bankruptcy and spiraling government deficits. Hence, I want some extra breathing room on the downside.
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The Russell 2000 Index (RUT) held its support level at $550 and closed at $556.43 today. The SPX closed up at $989 but remains below its critical resistance level of $1000. The consensus of the talking heads was to credit the positive earning announcements from Home Depot and Target for today's market strength. I am inclined to think the market just needed a breather. When it goes up that far that fast, the slightest twitch will set off profit taking and that is what happened yesterday.
My August iron condor stands at a P/L of -$590, delta = -$7 and theta = +$147. The $590 strike is now almost three standard deviations OTM and the $490 strike is over five standard deviations OTM. As long as these strikes remain greater than two standard deviations OTM, I will allow the position to expire worthless.
I purchased one Oct $510 put yesterday to hedge my Sept iron condor position; the delta of the Sept $510 puts dropped to 18 this morning, so I sold the Oct put for $12.50, a loss of $340. I added 20 contracts of $620/$630 call spreads at $0.50 and 20 contracts of $480/$490 put spreads at $0.70. My Sept Iron Condor position now consists of 30 contracts of the $620/$630 calls, 10 contracts of the $500/$510 puts, and twenty contracts of the $480/$490 put spreads. The total net credit now stands at $4,360 with a current P/L = -$440, delta = -$5, and theta = +$184.
